July inflation expected to be cushioned by zero-rated GST

RAM Ratings expects the zero-rated goods and services tax (GST) to act as a cushion limiting inflationary pressure on Malaysia’s July inflation rate, which is projected to increase to 1% from 0.8% in June.

Meanwhile, full-year inflation is expected to stand at 1.3 %.

Transport fuel is seen as a trigger to higher inflation given the 12.4% rise in the average price of RON95 petrol in July (June: 9.9%) amid low-base effects. Prices had averaged RM1.96/litre in July 2017 compared with RM2/litre in June 2017 against the current subsidised level of RM2.20/litre.

Commenting on the sales and services tax, RAM head of research Kristina Fong said initial assessment on the new tax regime and its potential inflationary impact does not indicate any destabilisation of prices or consumption at this juncture due to the smaller share of products in the consumer price index basket and its nature as a single layer tax applying to manufacturers rather than end-consumers directly.

This is supported further by the less restrictive administrative costs of implementation and proposed exemptions on raw materials, components, and packaging for registered manufacturers.

“In view of the deflationary pressure from the change in the taxation system, coupled with lower fuel prices from the reinstatement of fuel subsidies and a persistently weak growth trajectory for food prices, overall inflation is envisaged to average 1.3% this year,” she said.

Given the lower core inflation and moderating GDP growth (4.9%), RAM said it appears to be a downward bias for the overnight policy rate (OPR) this year.

However, it expects the interest rate to remain unchanged at 3.25% through the rest of 2018 on the back of lingering policy uncertainties and some macro risks may still pose a risk to capital outflows.

“That said, we believe that monetary policy will play a bigger role because fiscal consolidation is perceived as a key trend going forward; hence less scope for additional pump-priming.”